Fort Lauderdale mulls a big gamble on pension costs

Bond offering could be shrewd management or risky bet

August 1, 2012|Michael Mayo, Sun Sentinel Columnist

Fort Lauderdale administrators want the city to borrow nearly $300 million by issuing new bonds and then give the money to investment pros. In turn, the finance wizards will invest in stocks, hedge funds, real estate and other things, with returns hopefully outperforming the 3.8 percent payout to bondholders.

Administrators say it's the best option to shore up sagging city pension funds and free up taxpayers' money to preserve city services.

"It makes a lot of sense," city manager Lee Feldman said.

"Instead of cuts, sometimes the smarter way is financial engineering," city auditor John Herbst said.

Fort Lauderdale commissioners will make the final call at an Aug. 21 meeting. If they don't approve the borrowing, Feldman says they'll have to trim another $4.3 million from the upcoming budget.

Seiler said the commission might not go for the full $300 million plan, perhaps cutting the bond amount to reduce the risk.

My gut reaction when I first heard the proposal: It's gambling.

My reaction after talking with Feldman and Herbst on Wednesday: It might be a gamble worth taking.

That's because the math isn't just based on whether the investments can do better than an annual 3.8 percent return rate over the next two decades. Herbst says there's a "90-to-95 percent chance" they will, noting that even in the last turbulent decade, pension plan investments yielded a 4.2 percent annual return rate.

"It's definitely not a sure thing," Herbst said. "But the likelihood of making money over the long term is pretty darn good."

There are other benefits, Herbst said.

As it stands, the city's pension plans for police, fire and general workers have $400 million in "unfunded liability," the term for the projected shortfall in pledged future retirement benefits. That's amazing, considering the plans were fully funded about 12 years ago.

It's also a problem, because the city must set aside money each year to make up the shortfall, based on a long-term formula that includes 7.5 percent interest. The amount needed in the past year, according to Herbst: $36.4 million.

By floating the bonds, the unfunded liability will be cut to $100 million and the city's annual payments to cover it will shrink. And Herbst said it's better to pay 3.8 percent interest to bondholders than 7.5 percent to the shortfall fund.

Seiler said the commission has taken steps to curb benefits and reform pensions for new employees, but obligations for past and current workers are bound by contract.

Generous benefits, more retirees getting payouts longer and dramatic investment downturns in late 2001 (after the Sept. 11 attacks) and late 2008 (after the Wall Street meltdown), have caused the pension plan woes.

This big bet might be the best course for the city, but with so much uncertainty in global financial markets, it could be a rocky road ahead. Wish Fort Lauderdale luck.